1. Explain how the credit analyst's focus will differ from the investment analyst's focus.
2. What are the limitations of financial ratios?
3. What do liquidity ratios measure? Activity ratios? Leverage ratios? Profitability ratios? Market ratios?
4. How is the Du Pont System helpful to the analyst?
5. Eleanor's Computers is a retailer of computer products. Using the financial data pro- vided, complete the financial ratio calculations for 2013. Advise management of any ratios that indicate potential problems and provide an explanation of possible causes of the problems.
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Industry Averages
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Financial Ratios
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2011
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2012
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2013
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2013
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Current ratio
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1.71X
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1.65X
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1.70X
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Quick ratio
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0.92X
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0.89X
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0.95X
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Average collection period
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60 days
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60 days
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65 days
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Inventory turnover
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4.20X
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3.90X
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4.50X
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Fixed asset turnover
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3.20X
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3.33X
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3.00X
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Total asset turnover
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1.40X
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1.35X
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1.37X
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Debt ratio
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59.20%
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61.00%
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60.00%
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Times interest earned
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4.20X
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3.70X
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4.75X
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Gross profit margin
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25.00%
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23.00%
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22.50%
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Operating profit margin
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12.50%
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12.70%
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12.50%
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Net profit margin
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6.10%
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6.00%
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6.50%
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Return on total assets
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8.54%
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8.10%
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8.91%
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Return on equity
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20.93%
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20.74%
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22.28%
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Income Statement for Year Ended 12/31/13 Balance Sheet at 12/31/13
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Sales
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$1,500,000
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Cash
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$125,000
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Cost of goods sold
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1,200,000
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Accounts receivable
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275,000
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Gross profit
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$ 300,000
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Inventory
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325,000
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Operating expenses
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100,000
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Current assets
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$ 725,000
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Operating profit
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$ 200,000
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Fixed assets (net)
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$ 420,000
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Interest expense
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72,000
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Total Assets
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$1,145,000
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Earnings before tax
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128,000
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Accounts payable
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$ 150,000
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Income tax (40%)
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51,200
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Notes payable
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225,000
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Net Income
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$76,800
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Accrued liabilities
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100,000
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Current liabilities
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475,000
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Long-term debt
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400,000
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Total liabilities
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$ 875,000
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Equity
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270,000
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Total liabilities and equity
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$1,145,000
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